Summary of an Article 1 Each student is assigned a specified article and pages. Each student submits a typed written summary and analysis of the assigned article and pages by Nov. 5, 2013, at the beg

Summary of an Article

1 Each student is assigned a specified article and pages. Each student submits a typed written summary and analysis of the assigned article and pages by Nov. 5, 2013, at the beginning of the class.

A group of students are assigned each article. Students assigned each article should coordinate the specified parts of the page where the assignment overlaps.

This is an individual assignment and not a group assignment.

2 On the written assignment indicate your name, full citation of the article and pages assigned.

3 For the assigned pages indicate the main points, any statistical test(s) performed, method(s) used to support the position(s) taken, and conclusion.

4 Your comments on the article.

this is the article i need you to summarize it which only pages from “PP. 396-399”

Carcello, Joseph V., Terry L. Neal, Zoe Vonna Palmrose, and Susan Scholz (2011). CEO Involvement in Selecting Board Members, Audit Committee Effectiveness, and Restatements. Contemporay Accounting Research, v. 28, no. 2 (Summer), pp.396-430.

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CEO Involvement in Selecting Board Members,
Audit Committee Effectiveness, and Restatements*
JOSEPH V. CARCELLO,
University of Tennessee
TERRY L. NEAL,
University of Tennessee
ZOE-VONNA PALMROSE,
University of Southern California
SUSAN SCHOLZ,
University of Kansas
1. Introduction
We investigate whether involvement of the chief executive ofFcer (CEO) in selecting board
members reduces audit committee effectiveness. A decade ago, studies found CEO influ-
ence reflected in appointments to full boards and audit committees of inside and grey
directors: directors who are employees or have business and family connections to the
company and its ofFcers (Klein 1998; Shivdasani and Yermack 1999). However, listing
standards adopted subsequent to the 1999 Blue Ribbon Committee Report limited the
ability of inside and grey directors to meet independence criteria, and the 2002 Sarbanes-
Oxley Act (SOX) proscribes inside and grey directors from audit committee membership.
1
Nonetheless, these regulations do not, and arguably cannot, consider the CEO’s myriad
personal connections. So, the CEO’s influence can still be exerted through directors who
appear independent, but are not independent in fact, if such directors can obtain board
membership. One way for this to occur is through CEO involvement in the board selection
process.
Thus, when the CEO is involved in the board selection process, there is a greater risk
that a director appears independent without being independent in fact. That is, although
there are no statutory violations of director independence standards, there are other ties
between the CEO and the director that may compromise the director’s independence. In
addition to potential social ties between the CEO and board members, CEOs may appoint
outside directors who share similar demographic characteristics and who are therefore
more likely to support the CEO than to monitor him or her (Westphal and Zajac 1995).
Therefore, we expect that previously documented beneFts of maintaining an indepen-
dent audit committee are decreased when the CEO is involved in selecting board members.
In addition, we expect that audit committee Fnancial expertise will be less effective in these
*
Accepted by Michael Willenborg. We would like to thank Beth Bryant, Brian Carver, Stacy Mastrolia, and
especially Carl Hollingsworth for their data gathering assistance. We also thank the associate editor,
Michael Willenborg, two anonymous referees, Mark Beasley, Rebecca Hann, Dana Hermanson, Mingyi Hu-
ng, April Klein, and seminar participants at the University of Arizona, Boston Area Research Consortium,
Colorado State University, University of Kansas, Miami University, Philadelphia Area Research Consor-
tium, University of Toronto, and University of Virginia-Darden for helpful comments.
1.
Section 301 of SOX requires all Frms listed on a national securities exchange or association (e.g., NYSE,
AMEX, NASDAQ) to maintain a 100 percent independent audit committee. Moreover, SOX Section 407
requires all public companies to disclose whether or not a Fnancial expert sits on the audit committee and,
if not, why not.
Contemporary Accounting Research
Vol. 28 No. 2 (Summer 2011) pp. 396–430
Ó
CAAA
doi:10.1111/j.1911-3846.2010.01052.x

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situations, because the expert is less likely to be independent in fact.
2
To investigate these
expectations, we examine the relation between CEO involvement in board selection and
Fnancial statement restatements.
3
Past research has found that audit committee indepen-
dence and Fnancial expertise are associated with a lower likelihood of restatements
(Abbott, Parker, and Peters 2004; Agrawal and Chandha 2005).
We Fnd some evidence that CEO involvement in the board selection process
eliminates
the beneFts of both an apparently independent audit committee and Fnancial expertise. In
addition, we Fnd that more severe restatements appear to drive these results, suggesting that
diminished effectiveness is associated with real economic costs to the Frm. ±inally, in con-
sidering these issues in the context of stock price reactions to restatement announcements,
we Fnd that the negative reaction is attenuated by audit committee independence, but only
when the CEO was not involved in selecting board members.
Our primary analyses focus on restatements announced from 1999 to 2001, the years
immediately following the Blue Ribbon Committee Report, when there was both variation
in practice and a fairly consistent regulatory regime. However, recognizing that our proxy
for CEO involvement in the director selection process is likely subject to some measure-
ment error, we extend our study to a separate sample of restatements of Fnancial state-
ments for Fscal years from 2001 through 2003, which includes some post-SOX years. The
Investor Responsibility Research Center (IRRC) database is available during this period,
allowing analysis of additional observations, although variation in audit committee charac-
teristics is more limited. We Fnd that our results apply in both time periods and analyses.
In late 2003, U.S. listing requirements altered the formal involvement of CEOs in the
board member selection process.
4
Exchange regulations now require NYSE-listed companies
to have a nominating committee comprising solely independent directors, and the NAS-
DAQ’s revised listing provisions require director nominees to be recommended or selected
by either a nominating committee comprising solely independent directors or by the indepen-
dent members of the full board of directors (Bebchuk and ±ried 2004). Thus, by using sam-
ples prior to the enactment of these provisions, our study provides useful insights on the
potential impact and efFcacy of requirements imposed in the aftermath of SOX.
±urther, the question of whether CEO involvement in the director selection process
reduces audit committee effectiveness remains important. ±or example, in Canada an inde-
pendent nominating committee is not required for Frms listed on the Toronto Stock
Exchange (see Ontario Securities Commission 2004 National Policy 58-201, 1.1), allowing
the CEO direct participation in the nominating process. In addition, U.S. public companies
not traded on a national exchange (e.g., NYSE and AMEX) or quotation system (e.g., NAS-
DAQ) and nonpublic U.S. companies likewise are not precluded from having CEOs involved
in their director selection process. While recognizing that our sample does not include Cana-
dian or U.S. private companies, our results may nonetheless inform consideration of CEO
involvement in the nominating process in these settings. ±inally, although U.S. companies
traded via the NYSE, AMEX, or NASDAQ now have to select board members via an
2.
Audit committee members are drawn from the full board, and prior research Fnds that board characteris-
tics have a signiFcant influence on audit committee characteristics (Klein 2002b). ±urther, independent
audit committees are generally effective in monitoring Fnancial reporting and auditing (e.g., Klein 2002a;
Carcello and Neal 2003; Abbott et al. 2004). Prior research also Fnds that audit committee Fnancial exper-
tise is associated with better Fnancial reporting quality (e.g., Anderson, Mansi, and Reeb 2004; Be
´ dard,
Chtourou, and Courteau 2004; Agrawal and Chadha 2005).
3.
Restatements for non-GAAP (generally accepted accounting principles) accounting are frequently used to
assess Fnancial reporting and audit quality (e.g., see Public Oversight Board 2000; General Accounting
OfFce 2002; Abbott et al. 2004; Kinney, Palmrose, and Scholz 2004; Agrawal and Chadha 2005).
4.
±or example, see NYSE Listed Company Manual Rule 303A, AMEX Guide sec. 804, NASD Rule 4350,
and Securities and Exchange Commission (SEC) Release No. 34-48745 (November 4, 2003).
CEO Involvement in Audit Committee Effectiveness
397
CAR
Vol. 28 No. 2 (Summer 2011)

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